Efficiency and competition in China's banking sector
China's banking sector has undergone remarkable changes during the last two decades, and banks in China today face more competitive pressure than ever before. The objective of this thesis is to investigate the efficiency and competition of the major Chinese banks over the period 1985-2002. After reviewing the evolution of the banking sector over the past half-century, the thesis addresses an important aspect of competition: X-efficiency and its potential correlates. X-efficiency is found to be as low as 40%-50% on average, suggesting that it is an important issue which should receive more attention from researchers, bank regulators and managers. State-owned banks are found to be less X-efficient than joint-stock banks, confirming the need for a shift in favour of shareholder owned banks. X-efficiency is also found to be more pronounced in the first stage of banking reform, implying that further interest rate liberalisation is necessary to help bank managers to be better able to control their costs. Tests for the presence of economies of scale and scope follow. The evidence is mixed but suggests that banks' cost structures may improve if the law prohibiting universal banking is relaxed. Finally, both the market-power and efficient-structure hypotheses are examined using a random effects panel data model. Some evidence is found to support the relevant market-power hypothesis and the X-efficiency version of the efficient-structure hypothesis for banks in the first and second reform stages, respectively, suggesting that the government's gradual approach to reform has improved the competitive structure of the banking sector. However, policy should be directed at enabling the more efficient banks to gain larger market shares. For example, the expansion of the joint-stock banks should be encouraged. There is little evidence of a 'quiet life' for the big four (state-owned) banks. However, while interest rate liberalisation should improve bank efficiency, policy makers must be aware of possible negative effects such as excessive market power, 'quiet life' effects, and other anti-competitive behaviour.